Canadian companies looking to stretch their IT budgets are increasingly exploring offshore outsourcing options, while sweeping industry globalization is also making Canada attractive to U.S. companies looking for cheaper “”nearshore”” service providers, according to high-tech business leaders and analysts.

And

despite mutterings of an unseemly rush to replace Canadian IT jobs with cheap overseas labour, companies here see offshore alternatives as just one of a range of outsourcing options, with many moving cautiously to embrace it.

“”My gut feeling is that there’s not a tremendous amount of overseas outsourcing by Canadian companies. At a complete guess, I’d say that less than a quarter of all Canadian outsourcing is offshore. A much higher percentage is outsourced to other companies here in Canada,”” said Dan McLean, a senior research analyst specializing in IT outsourcing at IDC Canada. “”But I think we’ll continue to see more Canadian companies exploring offshore options. It’s an evolution of outsourcing,””

While the U.S. is by far the world’s largest offshore outsourcer, India is the leading service provider with Russia, China, Ireland and Eastern Europe emerging as key players. “”Basically, any region that combines high-tech skills with low costs can be an offshore outsourcing centre,”” said McLean. “”The cost savings can run anywhere from the five per cent mark to much higher, depending on the project or customer.””

One of Canada’s biggest offshore outsourcing exponents is IT services firm CGI Group Inc., whose Indian application development facilities in Bangalore and Mumbai employ 500. The plants work on software development, Web development and wireless applications for CGI clients in Canada and the U.S., many of them Fortune 100 corporations and most of them in the health-care, retail or financial services sectors. The company says its overseas plants serve a growing need in the North American IT sector.

“”Most CIOs are being asked to do more with the same or even lower budgets,”” said Joe Saliba, CGI’s president for USA and India. “”With offshore outsourcing, we can save our clients as much as 40 per cent. The Indian workforce is very skilled, diverse and flexible. Any technology you need, they have it. Bangalore is the Silicon Valley of India.””

While Saliba is familiar with arguments that Canadian jobs are threatened by offshore operations, he said that, on the contrary, CGI’s overseas plants have enabled the company to expand its markets. “”It’s not about taking jobs from Canada but doing more for our clients. Over the last five years, we’ve had a shortage of resources here in Canada, so with our offshore operations, we are able to do more for our customers than we normally could.””

According to Marie Lemay, CEO of the Canadian Council of Professional Engineers (CCPE), focusing solely on the number of jobs at offshore plants ignores the bigger picture of increasing IT globalization. Her evidence suggests that greater internationalization of the market has created more opportunities for Canadian workers. “”Since the mid-1980s, work from international sources has grown by 10.6 per cent in Canada, outstripping overall employment growth in engineering. This will double over the coming years,”” said Lemay, who adds that her association will continue to keep a close eye on the effects of offshore outsourcing on Canadian jobs.

But despite the growth of outsourcing options, Canadian companies face significant challenges in maximizing the effectiveness of their offshore initiatives. Yves Leclerc is a senior practice director in consulting at Oracle Canada. Oracle has outsourcing operations in Latin America and has been providing its clients with offshore technical development from its two Indian plants for four years. The company employs 4,000 Indian workers.

“”We’ve learned a lot. We learned that we needed to adjust our processes and rationalize communications. We also worked hard to synchronize operations and change checkpoints to make the process more efficient,”” said Leclerc. Building in these new systems added a 10-15 per cent overhead to project costs, but Oracle’s clients still routinely save between 25 and 50 per cent by going the offshore route, he said.

While offshore outsourcing cuts client costs, savings are not always as great as expected and they represent only a part of the picture, according to Tom Wolf, senior vice-president of e-business at RBC Financial Group. “”People say developers are cheaper in India, but those quotes are always based on U.S. dollars. There are additional overheads to offshore outsourcing projects: you still have to manage the project, whether it’s outsourced or not,”” said Wolf

RBC, which Wolf said has one of the largest IT budgets in Canada, recently embarked on its first major offshore outsourcing project. Despite its success, it provided some unexpected challenges. “”Co-ordination of the parties added complexity to the project. And our project management processes were different to the outsourcers, including the pace of our approval process,”” said Wolf.

While RBC will continue to use offshore outsourcing on an as-needed basis, the company is taking a cautious approach. “”You have to make sure that communications will not be a weakness on the project. Outsourcers in China and Russia, for example, may not be as strong as those in India when it comes speaking English. Costs and savings will also vary and while India is cheap now, it may be more expensive in the future.””

For the Canadian arm of consulting and technology services company Accenture, there’s no doubt that offshore outsourcing will continue to be a growth market, despite the current climate of geopolitical instability around the world. “”With U.S. companies reluctant to be seen exporting jobs too far overseas at the moment, Canada can benefit as a nearshore provider from its proximity, shared language and similar business practices. The concerns in the U.S. after 9/11 translates into dollar opportunities for Canada,”” said Blake Hannah, partner, financial services.

In the longer term, Accenture sees overseas outsourcing as representing a fundamental shift in the way companies operate. “”A recent study we conducted among Canadian businesses found that most wanted to change their business processes; they wanted to use outsourcing to transfer some of their risks. The real advantage of offshore outsourcing is that it can effectively change the way a business operates,”” said Hannah, whose company has plants in 12 countries, including the Philippines, the Czech Republic and India.